Net cash flow from operating activities is the revenue generated from doing business, minus all operating expenses. This figure is calculated on a company's statement of cash flows and is used to determine the company's liquidity. Cash flow reflects the amount of money a business has on hand to pay bills, which can be different from the overall income that may be carried on the books. A positive financial position can reflect numerical adjustments to income that do not involve intakes of cash, such as depreciation deductions. Determining net cash flow from operating activities allows a company to distinguish between a healthy financial position that exists on paper and one that exists in practice.
Operating activities include virtually all of the things a business does to sell goods and services in the marketplace during the year. These activities are a distinct category from other sorts of passive income-producing activities, such as collecting interest, investing and renting property. When a business evaluates its entire financial position or prepares tax returns, it sums up all sources of income to arrive at a total gross income figure. This figure can be misleading, because it can show that a business is making a profit when it does not have enough monthly liquidity to pay the bills.
Profit and liquidity are two different concepts that show somewhat unrelated aspects of a company's financial health. From a big picture perspective, a business strives to be profitable. Profitability is a paper concept, however, that can result from applying deductions, tax credits or one-time write-offs against income and expenses. What often really matters to a business for purposes of daily operations is if it has enough cash coming in to pay its creditors on time every month. An evaluation of cash flows tells a business where it stands on this issue.
The concept of net cash flow from operating activities reflects the amount of cash the company has on hand after operating expenses are deducted from total sales. It is important to only deduct those expenses that result from operations in the ordinary course of business. For example, expenses to acquire a one-time capital asset, such as a new factory, would not be included in operating expenses because the expense does not relate to the regular sale of the company's goods.
Companies prepare a standard set of financial statements that helps them disclose their financial affairs. This set includes an income statement and a statement of cash flows. Net cash flow from operating activities is the last computation on the statement of cash flows. This is derived by taking the net income figure from the income statement and adding and subtracting certain income and expense amounts that are pertinent to cash flow.
